While there is continued growth in consumer loans thanks to auto finance and credit card lines, mortgages and HELOCs continue to languish and cap FI revenue growth. During a February 11 American Banker webinar, Aite analyst Christine Pratt said that U.S. economic conditions have slowed consumer demand for credit and lender growth, along with significant regulatory hurdles that could continue for two years. “For regulated FIs, demands for compliance and transparency result in less time for customers,” said Pratt, noting that these demands severely impact IT and operations’ available resources.
As FIs have dealt with this regulatory burden and been less able to focus on customer experience, competitors have taken advantage. Quicken Loans, a nonbank lender and now the second biggest retailer of mortgages, has continually topped consumer satisfaction surveys and Ally Bank (formerly GMAC) recently became the #1 used car lender in the US, said Pratt. Non-depository independent mortgage companies accounted for 47 percent of mortgage loans and 42 percent of mortgage refinancing in 2014, up from 43 percent of mortgage loans and 31 percent of refinancing in 2013.
Alternative lenders, seeking to eliminate the friction that often frustrates consumers in their pursuit of loans, have been mounting a strong challenge across a wide spectrum of financial products. These firms offer refinancing of student loans, unsecured loans with upper limits of $100,000 and loans to small businesses. However, Pratt said banks and credit unions view alternative lenders more so as partners than threats, with “many looking at how they leverage technology for speed and delivery of loans.” She also predicted that alternative lenders will have turbulent times ahead, as regulators impact their business and loans go belly up. “The regulatory issues raised with the algorithms being used to decision and the inability for consumers to be able to get back to where that information is — the transparency of the information is of concern. In the small business space there is a push for regulators to look at the small business customer as a consumer, to grant those FRCA (Fair Credit Reporting Act) rights to small business owners. Credit card act rules might then (apply) to small business owners as well. Interest rates could not be charged as high as they are now charged,” said Pratt. The second concern "is the investors themselves, the folks investing in these portfolios in a crowdfunding environment. If these loans go under and specifically if they're invested in mortgage loans, the one who winds up holding the loss is the individual investor.”
In spite of these potential headwinds, webinar participants felt that alternative finance lenders hold some key advantages over traditional FIs. 35 percent of webinar participants felt this advantage was in the application process, with another 35 percent observing an advantage in underwriting. 18 percent of participants viewed credit modeling as an advantage for alternative finance lenders.
Nontraditional data is being used by lenders to assess creditworthiness but Pratt said FI executives are struggling to obtain it. Examples would include transaction data and even rent payments. "Lenders see a role for non-traditional attributes for the development of new predictive payment models," said Pratt. 75 percent of webinar participants said it was either extremely or very likely that alternative data sources, like financial account and transaction data, could improve their ability to make better credit and lending decisions.
Whether consumers will like what that transaction data reveals is an open question, as it can either help or hurt them. "If you write a check that goes NSF (non-sufficient funds) to the dry cleaners that will never show up on the credit report. Seeing a significant number of those checks is a high risk factor," said Terrence McKeown, Practice Manager for Credit Analytics at Envestnet | Yodlee. McKeown said that a better understanding of deposits, income or NSF across various accounts would "highly impact some of the lending decisions you're making right now."